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Purple Crayon: Commodity Crash Field Position

Fin - Breakout - US

The Purple Crayon isn't just my homage to an ancient French children's story , although, let's face it, the books are genius in their own right. The point of my purple crayon is much more practical. Specifically, its a method of simplifying the charting process to its barest elements in an effort to level the field between lay-investors and professionals. You can dismiss charts as "voodoo" if you wish, but doing so is akin to a boxer eschewing his left hand entirely because "real fighters" throw haymakers. Ignore the charts long enough and you're eventually going to get hit by a chart breakdown you simply never saw coming because you were lost in the fundamentals.

Charts aren't fool-proof but nothing, nothing, in markets is. Anyone saying otherwise is selling you something you don't want. I'm over-educated by half. I can talk fundamentals all day. I wouldn't buy or sell anything in a market without first looking at the trend.

All that having been said, in this edition of the Crayon, I'm taking a look at the market's field position in the wake of last week's historic breakdown in commodities, a possible trend-reversal in the dollar and where the strange moves left stocks and commodities as a whole.

* U.S. Dollar: The buck has been going down with only brief interruptions for years. You can give me the reasons if you like, but I'm fairly sure I've heard them before. I don't even disagree with the observation that the U.S. has been abusing the greenback for years. Less obvious is what we wrote about a couple weeks ago: The short-dollar trade is beyond crowded. When a trade becomes too obvious, I want the other side because the reversal is going to be fierce. For many and no reasons, the euro dropped sharply against the dollar last week. You may think it had nothing to do with the commodity sell-off. The euro peaked at $1.49 last week and is around $1.43 as I type. That's a big move for currencies. There's plenty of support for the euro in the $1.40 area but, for now, the dollar is getting stronger. The dollar is the dog, everything else is part of the tail being wagged one way or the other.

* Crude: Texas Tea tumbled about 15 bucks last week, snapping a short-term uptrend and settling just under the big round number of support at $100. Here again we have all kinds of explanations (read: guesses), including a baby flash crash where sell-stops were triggered all the way down, exacerbating selling. Truthfully, I don't much care for conspiracy theories. Not because I don't believe them (ask me about the moon landing!) but because they don't make me money. Crude next has decent support at around $90.

*Gold: I'm still long the GLD, primarily because you'll never see me doing "magic trades" where pundits tell you they sold a position just before a sell-off. Were I still trading for clients, I'd be gone already. Gold is sort of at support and bouncing higher after a fairly good beating last week. I can't overstate just how itchy my trigger finder is on gold. My cost basis is in the $750ish area, so I've got some house money with which to play. Of course, I'm not "playing" at all; I've got my GLD on about a 1-inch leash. A close meaningfully below $1,475 and I'm booking the trade and taking the kids to Sizzler.

*Silver: Silver isn't done being volatile but the bubble is well and truly popped. There are plenty of arguments to be made for the fundamentals over the long term. I'll concede them all, if it pleases you. But I won't buy silver for a trade or investment. I genuinely wish silver longs well.

* S&P 500: The breakout I discussed at 1,340 tried to work and then, alas, failed. Why didn't I go bearish last week when the S&P traded in the low 1,330's? I use a figurative crayon because the point is thick. I like my breakouts and breakdowns to be about 1% and I only count the close. The Breakout call hasn't been flat-out wrong... yet... but it's looking a little doggy at the moment.

That's where we're sitting as the crayon sees it. Let us know what you think either in the comments below (all of which I read) or via email at BreakoutCrew@Yahoo.com.